Kinross slashes gold reserves by a massive 33%

TORONTO • Kinross Gold Corp. has slashed its gold reserves by a staggering 33% as it focuses on mining high-grade ounces in a low-price environment.

The Toronto-based miner surprised investors on Wednesday by stating that its year-end reserves have dropped to 39.7 million ounces, down from 59.6 million at the end of 2012. It is a massive decline, particularly since Kinross used the same gold price in both years (US$1,200 an ounce) to calculate reserves.

Kinross said that part of the drop (6.7 million ounces) was due to the removal of its failed Fruta del Norte project in Ecuador, and part of it was simply depletion from mining. But the other key factor is its internal strategy.

The company wants to stick to mining high-margin ounces. As a result, it decided to calculate reserves using what it calls a “fully-loaded costing methodology” that factors in costs for sustaining capital, waste management and other work. The result is that millions of marginal ounces were dropped out of reserves.

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The positive aspect of this strategy is that mining only higher-grade ounces means that the company’s profitability and cash flow should improve. The average grade of the reserves went up 14%.

Kinross chief executive Paul Rollinson referred to it as a “quality over quantity” strategy. It represents a startling shift for the gold industry, as companies were desperate to grow their reserves when prices were going up. At today’s lower prices, they are simply trying to maximize their earnings.

The Kinross mine that is most affected is the Paracatu operation in Brazil, where reserves fell by an astounding 6.8 million ounces. The mine life declined by roughly 12 years, though it still extends to 2030.

The irony of this news is that Kinross is the one senior gold company that was not expected to slash its year-end reserves. That is because it used a conservative price of US$1,200 to calculate reserves last year, before gold prices cratered. Rivals like Barrick Gold Corp. and Goldcorp Inc. used more aggressive prices, and were fully expected to cut their reserves this year as they lowered their assumptions. Both companies report fourth quarter earnings on Thursday.

Aside from the reserve issue, Kinross’s Q4 results were a mild disappointment. The company reported a surprising loss of US$25.1-million on an adjusted basis (or US2¢ a share) due to higher cost of sales and depreciation. On average, analysts were expecting a profit of US3¢.

The earnings were also marred by a US$544.8-million writedown, primarily tied to the Maricunga mine. That is a result of changes to the mine plan and a related drop in reserves.

However, Kinross met its production and cost guidance for the year. For 2014, the company expects all-in sustaining costs to fall between US$950 and US$1,060 an ounce, down from US$1,063 last year.

“Backed by a strong balance sheet and healthy liquidity, we enter 2014 committed to maintaining our record of financial discipline and solid operational performance,” Mr. Rollinson said in a statement.